Reports

The investment promotion process in Albania is underperforming versus its potential. Between 2014 and 2018, the Albanian economy saw accelerating growth and transformation, which has been tied to the arrival of foreign companies. However, Albania has the potential to realize much more and more diversified foreign direct investment (FDI), which will be critical to accelerating growth in the period of global recovery from the COVID-19 pandemic. As the Albanian economy weathers the storm of COVID-19, it is critical to look to the future by enhancing the investment promotion process to be more targeted and proactive such that Albania can attract transformative global companies aligned with the country’s comparative advantages. This is not only a critical step toward faster and more resilient economic growth in Albania; it also happens to have very high returns in comparison to the limited fiscal spending required to implement the actions required.

The targeted investment promotion approach discussed in this note would capitalize on Albania’s many existing comparative advantages for attracting efficiency-seeking FDI. It would not displace Albania’s Strategic Investment Law nor the activities of the Albanian Investment Corporation (AIC), which aim to expand the country’s comparative advantages. Efficiency-seeking FDI — global companies that expand into Albania to serve global markets because it makes them more productive — do not need extensive tax incentives, regulatory exemptions, or other subsidies. In fact, an overreliance on these approaches can crowd out firms that do not want or need to rely on government support. Adding targeted investment promotion to Albania’s growth strategy would lead to more jobs, better quality jobs, more inclusive job growth, faster convergence with the income levels of the rest of Europe, and ultimately less outmigration.

This note summarizes the Growth Lab’s observations of the investment promotion process in Albania, over the last year in particular, and lays out recommendations to capture widespread opportunities for economic transformation that have been missed to date. The recommendations provided at the end of this note provide a roadmap for building an enhanced network for targeted investment promotion that is specific to Albania’s context. These recommendations recognize the current constraints that the COVID-19 pandemic creates but also look past the pandemic to prepare for opportunities that will emerge during the global recovery.

Ethiopia will need to increase the diversity of its export basket to guarantee a sustainable growth path. Ethiopia has shown stellar growth performance throughout the last two decades, but, in this period, export growth has been insufficient to finance the country’s balance of payments needs. As argued in our Growth Diagnostic report,1 Ethiopia’s growth decelerated as a result of the increasing external imbalances which have resulted in a foreign exchange constraint. This macroeconomic imbalance is now slowing the rate of economic growth, job creation and poverty alleviation across the country. Although export growth will not be rapid enough to address the foreign exchange constraint on its own in the short-term, the only way for the country to achieve macroeconomic balance as it grows in the longer term is to increase its exports per capita. With only limited opportunities to expand its exports on the intensive margin, the Government of Ethiopia (GoE) will have to strategically support the diversification of its economy to expand its exports base.

This report applies the theory of Economic Complexity in order to describe the base of productive knowhow and assess the opportunities and constraints to diversification in Ethiopia’s economy. The theory of Economic Complexity offers tools to capture and quantitatively estimate the diversity and sophistication of productive knowhow in an economy and to analyze the potential to develop comparative advantage in new industries. These tools provide valuable inputs for informing diversification strategies and the use of state resources by providing rigorous information on the risks and potential returns of government industrial policies in support of different sectors.

The One Village, One Product (OVOP) movement started 40 years ago in a rural Japanese prefecture, with the aim of helping small villages and towns develop by focusing on their local culture and resources. Since then the principles of the OVOP movement have spread to other countries, including Thailand, Malawi, and beyond. The varying levels of success across these different versions of OVOP suggest some lessons on how to best organize rural development programs that could be useful as the Albanian government embarks on its flagship 100+ Villages project.

Throughout 2016, CID conducted a growth diagnostic analysis for Sri Lanka in collaboration with the Government of Sri Lanka, led by the Prime Minister’s Policy Development Office (PDO), and the Millennium Challenge Corporation (MCC). This presentation report aggregates collaborative quantitative and qualitative analysis undertaken by the research team. This analysis was originally provided to the Government of Sri Lanka in April 2017 in order to make available a record of the detailed technical work and CID’s interpretations of the evidence. A written executive summary is provided here as a complement to the detailed presentation report. Both the report and the executive summary are structured as follows. First, the analysis identifies Sri Lanka’s growth problem. It then presents evidence from diagnostic tests to identify what constraints are most responsible for this problem. Finally, it provides a summary of what constraints CID interprets as most binding and suggests a “growth syndrome” that underlies the set of binding constraints. 

In brief, this growth diagnostic analysis shows that economic growth in Sri Lanka is constrained by the weak growth of exports, particularly from new sectors. Compared to other countries in the region, Sri Lanka has seen virtually no diversification of exports over the last 25 years, especially in manufactured goods linked through FDI-driven, global value chains. We found several key causes behind this lack of diversified exports and FDI: Sri Lanka’s ineffective land-use governance, underdeveloped industrial and transportation infrastructure, and a very high level of policy uncertainty, particularly in tax and trade policy. We believe that these issues trace back to an underlying problem of severe fragmentation in governance, with a critical lack of coordination between ministries and agencies with overlapping responsibilities and decision-making authority.

In August 2016, the Government of Sri Lanka (GoSL) and the Building State Capability program of CID convened five teams of civil servants, tasking them with solving issues related to investment and export promotion. One of these teams, the “Targeting Team,” took on the task of formulating and executing a plan to identify promising new economic activities for investment and export promotion in Sri Lanka. With the assistance of CID’s Growth Lab, the Targeting Team assembled and analyzed over 100 variables from 22 datasets, studying all tradable activities and 29 representative subsectors. Their analysis highlighted the potential of investment related to electronics, electrical equipment and machinery (including automotive products), as well as tourism. Ultimately, the team’s recommendations were incorporated in GoSL strategies for investment promotion, export development, and economic diplomacy; extensions of the research were also used to help plan new export processing zones and target potential anchor investors.

This report summarizes the methodology and findings of the Targeting Team, including scorecards for each of the sectors studied.

In Albania, the average specific expenditure by foreign tourists (non-residents) was 13.3% of GDP during 2013-2017, which clocked a 30% growth within the four-year duration. The number of foreign citizen arrivals in the first half of 2018 has seen an increase by 9.1%, as compared to the same period in 2017. "Holiday" is the second most popular purpose of their visit reported after "Others." Tourism being the largest industry since 1990, with Europe representing 42%3 of its total share, there remain huge economic dividends to reap for the emerging tourism industry in Albania. Moreover, this sector can generate non-farm employment in the agriculture sector. The challenge then is it to understand what is driving tourism growth in Albania, and what binds Albania’s tourism opportunities from growing faster.

The UN World Tourism Organisation (UNWTO) defines sustainable tourism as an enterprise that achieves a balance between the environmental, economic and socio-cultural aspects of tourism development for long-term benefits to recipient communities. The Government of Albania, led by Prime Minister Edi Rama, has identified Agritourism as a particularly inclusive and sustainable tourism opportunity and prioritized its development as a rural economic diversification tool within the country’s new "100+ villages Programme." Consistent with this program, the Ministry of Tourism and Environment (MoTE) has started certifying Agritourism businesses, while Ministry of Agriculture and Rural Development (MoARD) through the Albanian Rural Development Agency (ARDA) is in the process of funding Agritourism projects. It is essential to understand the emerging patterns within the sector to strategize appropriately supportive policies.

The Movements of citizens in Albania (INSTAT) report for June 2018 indicates a decrease by 13.3% in the number of foreign citizens’ arrivals as compared to June 2017. There is (month-by-month) erratic traffic of tourists and hence undefined tourism season for the country. The Government of Albania faces a dearth of tourism specific information, like in attractions visited most by tourists, or mapping of identified agritourism farms to make better policy judgements required for seasonal tourism preparedness.

Economies grow by adding new products and services to their production portfolio, not by producing more of the same kinds of products. The key to such diversification is access to know-how, but know-how often has to come from abroad. This is because it is often easier to move brains to new countries than to move new know-how into brains. In the experience of Singapore, India, Vietnam and most other dynamic economies, three channels of know-how transfer stand out: FDI, immigration and diaspora networks.

In this lecture, Professor Hausmann explores the relationship between economic development and the accumulation of know-how. In particular, he discusses how to tackle Sri Lanka’s limited export diversification.

Video - Accessing Know-how for Growth in Sri Lanka

Video - Full Q&A on Sri Lanka's export diversification

This note collects evidence related to possible constraints to economic growth, and their relation with GoSL’s industrial zone development agenda. We find that new zones are especially well-suited to help address Sri Lanka’s lack of industrial land and high policy uncertainty, both of which may be holding back growth. Less clear, however, are zones’ impact on Sri Lanka’s limited transport links beyond the Western Province. Finally, partnering with well-connected zone management companies may also help create opportunities to connect with firms in new, non-traditional sectors.

Sri Lanka has an excessively complex tariff structure that distorts the structure of the economy in important ways. It is a priority for the Government of Sri Lanka (GoSL) to rationalize the system in order to facilitate a transition to greater economic diversification, stronger export growth, and the emergence of new, higher paying jobs. Sri Lanka’s New Trade Policy makes this tariff rationalization a priority. It also recognizes that tariff rationalization should go hand in hand with new trade adjustment assistance measures to support the adjustment of firms and of people. The New Trade Policy outlines the basic contours of tariff rationalization and trade adjustment assistance measures but does not provide a detailed roadmap.

This discussion paper was prepared at the invitation of the Ministry of Development Strategies and International Trade (MoDSIT) as part of the Center for International Development’s research project on sustainable and inclusive economic growth in Sri Lanka. The aim of the paper is to study policy tools that the GoSL could use to structure trade adjustment assistance in the context of tariff rationalization. In order to accomplish this aim, we begin by outlining the type of tariff rationalization that needs to take place in order to address key constraints to growth in a way that is sensitive to both government revenue needs and political economy considerations. We stress that tariff rationalization must be approached in a holistic way that treats the various tariffs and para-tariffs as interrelated, rather than an approach that attempts to address one part of the system at a time. A holistic approach would provide many degrees of freedom to solve the underlying problems in the system while increasing revenues and potentially generating strong public support. Critically, a holistic approach would allow for a single tariff rationalization plan to be phased in over a period of years in a predictable way, whereas attempts to rationalize the system one part at a time would lead to extreme uncertainty.

With the principles of smart tariff rationalization in place, we draw upon international lessons and Sri Lanka’s own institutional capabilities to recommend a two-tiered approach to helping industries and workers adjust. In each case, the first tier represents low-cost measures that can begin in the short term to help industries and workers, regardless of whether they will be negatively impacted by tariff rationalization, while the second tier of assistance applies only to trade-affected industries and workers and can be developed in the medium term. For industries, Tier 1 support involves the use of an innovative process of public-private problem solving of industry-specific constraints, and Tier 2 support involves the use of special safeguard measures to provide an objective and transparent process for determining which industries require longer phase out periods for tariff reductions versus the tariff rationalization plan. For workers, Tier 1 support involves improved access labor market information and training opportunities through the development of regional (or local) job centers. Tier 2 support provides government funding for training and job placement services. We conclude that this package of trade adjustment assistance measures could be used to complement a holistic tariff rationalization plan. But we caution that attempts to rush the implementation of these measures without careful design and communication could deeply undermine the potential for the reforms to work in solving underlying economic problems.

How can the productive capabilities of each municipality be unleashed taking into consideration the resources available to them? A first pass at this ambitious question begins by understanding the set of outputs a municipality is capable of producing. We answer this by discovering relationships between agricultural inputs and outputs and ask a relatively simpler question: how similar are agricultural outputs in terms of the inputs they use? Answering this question is made difficult by the fact that most UPAs cultivate just one or two crops. This may be a rational response to economies of scale. Given a plot of land and inputs, it may be easier to cultivate one crop on the entire land than plant a number of them with each requiring a different care regimen³. It may be that the inputs available only allow for a few types of crops.

In this paper, we use the rural census data from Colombia to build an agricultural product space capturing the similarities between outputs. We test the predictive power of the product space and use this to answer the question above. In section 2, we discuss the various sources of data and how they are merged, cleaned, and transformed before processing. In section 3, we look at some high level features of the dataset and how inputs, outputs, and land use are related. In section 4, we explore the mechanics of diversification.

We construct similarity and density matrices and show that they do indeed predict what a municipality produces. Finally, in section 5 we use Machine Learning algorithms and the density matrices to predict municipalities that are best suited to produce a given output. Further, we identify "missing" municipalitiesoutput pairs i.e. municipalities that should be producing a given output at high yield but currently are not. Finally, we summarize our findings and suggest areas for further work.

In this report we will be making extensive use of concepts described in more detail in the companion report "How Industry-Related Capabilities Affect Export Possibilities," especially with respect to Machine Learning techniques.

The central question we will explore in this document is: Can we anticipate the opportunities that Colombian cities have to export specific products based on their existing productive capabilities?

In the following pages, we report a collection of results, analyses, and advances in which we assess how industry-related capabilities affect export possibilities. Our final goal will be to create a single measure that synthesizes all the knowledge and existing information about the productive capabilities of each city, both “horizontal” and “vertical”, and that quantifies how competitive a city can be if it aims at exporting a given product it does not yet export.

This document is broken in two main efforts: First, we want to understand the “mechanics” of diversification processes. And second, we want to be able to provide recommendations of products that are not produced in cities, but should be. The first effort requires a multitude of analyses, each trying to describe the characteristics of firms, of cities, and of the mechanisms that expand the export baskets of places. The second effort requires the development of a statistical model that is accurate when predicting the appearances of products in cities. These two efforts, explaining and predicting, are complementary, but different.

Explanations that lack the power of accurately predicting the future are useless in practice; predictions of phenomena for which we lack understanding are dangerous. But together they provide a unified story that can inform policy decisions.

Immigration and Economic Transformation: A Concept Note

Ljubica Nedelkoska, Tim O’Brien, Ermal Frasheri, Daniel Stock

In May 2017, CID prepared a concept note that described the connection between immigration and knowhow transfer internationally and profiled the current state of low immigration levels and immigration policy issues in Sri Lanka. The note identifies immigration policy reform as an important area of opportunity for unleashing higher levels of entrepreneurship and the introduction of new knowhow for economic diversification in Sri Lanka, but stops short of providing specific recommendations. Instead, the note lays out broad ideas for making immigration policy more flexible and encourages the Government of Sri Lanka to activate a cross-government policy team that is capable of developing reforms that meet Sri Lanka’s particular needs. 

A Comparative View on of Immigration Frameworks in Asia: Enhancing the Flow of Knowledge through Migration

Ermal Frasheri, Ljubica Nedelkoska, Sehar Noor, Tim O’Brien

Later in 2017, at the request of a policy team of the Government of Sri Lanka, CID conducted research to compare immigration policy frameworks in other countries in Asia to understand promising policy options for Sri Lanka. Our resulting research note focuses on Indonesia, Vietnam, Thailand, Malaysia, Hong Kong, and Singapore. We find that the immigration policies of the six countries vary across numerous dimensions as each country prioritizes attracting the talents, skills and resources it needs from abroad in different ways. These variations provide a range of examples that may be relevant to decision-makers in Sri Lanka. Additionally, we find an emerging pattern among the six countries where more developed economies tend to have more elaborate immigration systems and target a more diverse set of people. By looking at available data, we also confirm that more elaborate immigration systems are closely associated with more actual immigration, higher presence of foreign firms, and higher levels of foreign direct investment (FDI) among this group of countries. Based on the comparative analysis, together with the issues identified by the Department of Immigration and Emigration’s Gap Analysis, it is possible to identify a number of principles around which future immigration reform in Sri Lanka should be organized. 

View Ricardo Hausmann's presentation to the Ministry of Development Strategies and International Trade.

In this study, we analyzed Albania’s industrial exports using the frameworks of the Product Space and Economic Complexity in order to determine which products Albania could diversify into in the near future. In particular, we identified groups of products that are technologically close to those which Albania already exports and which at the same time are technologically more sophisticated (more complex) than Albania’s average exports. This analysis does not suggest that products that do not fulfill the criteria of technological proximity and product complexity should not be invested in. However, it suggests that some products may have higher chances of succeeding in Albania because of its existing technological capabilities, while also bringing about diversification towards more complex, higher value-added production.

We find that the top two sectors that satisfy the criteria of being in close proximity to the existing technological capabilities in Albania, while also having relatively highly complex products, are Plastics/Rubbers and Agriculture/Foodstuffs. Within each of these sectors, we list more specific products that make for good candidates for diversification.

Venezuela is at a breaking point. The political, economic, financial, social and humanitarian crisis that has gripped the country is intensifying. This unsustainable situation raises several urgent questions: Which path will the embattled OPEC country take out of the current turmoil? What type of political transition lies ahead? What short-term and long-term impact will the crisis have on its ailing oil industry, economy and bond debt? What would be the best and most effective prescription for oil and economic recovery under a new governance regime? To discuss these matters, the Center on Global Energy Policy brought together on June 19, 2017 a group of about 45 experts, including oil industry executives, investment bankers, economists and political scientists from leading think tanks and universities, consultants, and multilateral organization representatives. This note provides some of the highlights from that roundtable discussion, which was held under the Chatham House rule.

About four years ago, at the onset of CID’s engagement in Albania, the country faced two issues that were threatening its macro-fiscal stability: a skyrocketing public debt and an insolvent, publicly-owned electricity distribution system that was plagued by theft and technical inefficiency. These two interlinked issues constrained both short-term economic growth and the ability of the country to develop new drivers of long-term growth. Over the subsequent years, the government was able to successfully respond to these constraints through a now-concluded IMF program and through a series of reforms in the electricity sector. With these constraints now relaxed, CID saw the need for a new analysis of the current and emerging constraints to growth in Albania. This analysis will guide future research and inform the government and non-government actors on emerging economic issues for prioritization.

While growth has accelerated over the last several years, to over 3% in 2016, this is not a pace that will allow for a rapid convergence of incomes and well-being in Albania with that of developed countries in Europe and elsewhere. This growth diagnostic attempts to identify the binding constraint to sustainably higher economic growth in Albania.

Recognizing that economic growth requires a number of complementary inputs, from roads to human capital to access to finance and many more, this report compares across eight potentially binding constraints using the growth diagnostic methodology to identify which constraint is most binding. This research was conducted throughout 2016, building on prior research conducted by CID and other organizations in Albania. Each constraint discussed in this report is cited by analysts within or outside the country as the biggest problem for growth in Albania. Through the growth diagnostic framework, we are able to evaluate the evidence and show that some constraints are more binding than others.

Despite serious issues in many other areas, we find that the binding constraint to stronger growth in Albania is a lack of productive knowhow. By “knowhow,” we mean the knowledge and skills needed to produce complex goods and services. Albania faces a unique knowhow constraint that is deeply rooted in its closed-off past, and the limited diversification that has taken place in the private sector can, in nearly all cases, be linked to distinct inflows of knowhow. The strongest sources of knowhow inflows into Albania have been through foreign direct investment and immigration, especially returning members of the diaspora who start new businesses or upgrade the productivity of existing businesses.

The evidence also points to particular failings in rule of law in Albania that play an important role in keeping Albania in a low-knowhow equilibrium. Weaknesses in Albania’s rule of law institutions, including frequent policy reversals and corruption in the bureaucracy and judiciary, increase the risk of investments and transaction costs of business. While it is difficult to separate perceptions from reality in this area, both perceptions of weak rule of law and actual rule of law failings appear to play critical roles in constraining more diversified investment in Albania. We find that while existing firms in Albania successfully navigate the rule of law weaknesses, and in some cases benefit from the system, potential new investors are acutely sensitive to rule of law issues.

 

Credit market activity in Albania has been sluggish in recent years in spite of low and declining interest rates. The economy lost its growth momentum after 2009. Investment and lending activity slowed down substantially despite low interest rates, relative macroeconomic resilience, and available capacity in the private sector to take on more debt. This study analyzes the supply (lenders’) and demand (borrowers’) sides of the market.

The reason behind the credit market failure is a supply-demand mismatch. Poor financial intermediation is the main problem on the supply side. Despite excess liquidity in the financial sector, banks are excessively risk-averse, bank practices and products are unsophisticated, and non-bank financial market is underdeveloped. Excessive risk aversion translates into tight credit standards, credit rationing and credit crunch for some economic sectors, in particular those dominated by SMEs. On the demand side, firms overall have a low appetite to expand, limited capacity to create bankable and financially viable projects, and are also constrained by infrastructural gaps and economic uncertainty. The mismatch results from the fragmentation of the credit market, with reliable borrowers from traditional sectors having easy access to finance, and other segments being almost fully deprived of credit.

Government and donor-led policies to mitigate the problem have had little success. Albania enjoys access to a number of domestic and external funding schemes primarily focused on alleviating funding constraints for credit-deprived sectors, but these programs have been ineffective. Further study is needed to understand the reasons behind the limited success of these programs.

A National Development Bank (NDB) could address some of the observed credit market challenges. While an NDB’s ability to directly resolve demand-side constraints would be limited, an NDB could effectively tackle supply-side constraints in the credit market as well as provide surveillance and collect information from the private sector, leverage technical assistance, and develop tailored financial products. Establishing an NDB should be considered carefully, taking into account functional, governance, funding, staffing and other risk factors.

In late 2015, CID was requested to conduct an initial analysis of constraints to sustained and inclusive economic growth in Sri Lanka. The findings of this analysis were presented at the Sri Lanka Economic Forum in Colombo in January 2016. This presentation outlined the initial findings and offered a series of questions that were then discussed at length with policymakers and academics during the two-day forum. The initial analysis found that recent growth and the sustainability of growth moving forward are constrained by weakness in Sri Lanka’s balance of payments, where a trade imbalance combined with low levels of foreign direct investment effectively puts a speed limit on economic growth. While monetary and exchange rate policy could be used to soften this constraint, solving the underlying problem requires structural transformation, which has proven difficult in Sri Lanka. At the same time, the analysis identified the government’s inability to raise revenues as a major risk that threatens to be more binding moving forward. Finally, the analysis identified the primary dimensions of inequality in the country as between regions and between cities and rural areas.

By request of the Government of Sri Lanka, the Growth Lab at Harvard's Center for International Development reviewed edible oils exports in September 2016 based on the latest available international trade data. The analysis identified the products and markets key to Sri Lanka’s edible oils sector and compared with competitor countries. Although edible oils are non-complex products that make up a small share of the country’s total exports (0.5% in 2014), they help to diversify Sri Lankan exports and may serve as stepping stones toward further diversification into other more complex exports in the future. Coconut oil, which made up 86% of Sri Lanka’s edible oils exports in 2014, is particularly promising, with exports growing by more than a factor of 10 in just five years and much room to grow based on global demand.

In October 2016, at the request of the Government of Sri Lanka and in advance of a investment promotion trip to Japan, this presentation was prepared to experiment with new forms of communication to Japanese industry groups. The Growth Lab at CID used export data, qualitative research on companies, and comparative work on free trade agreements to identify promising opportunities for Japanese investment in Sri Lanka in targeted sectors, which were emerging through work by Sri Lanka’s Ministry of Development Strategies and International Trade with the support of CID.